Simple Sole Proprietorships
Sole proprietorships are the most simple forms of business to set up. When people start in business this is the type of business most engaged in.
The business is not a separate entity. The owner of the business and the business itself are one in the same. The day to day responsibilities of running the business falls on the shoulders of the owner.
All the assets are his and all he enjoys the profits generated by this business. The business is managed by the owner and there is no board of directors.
Because the sole proprietor is the business all liabilities connected to the business are also his. All the personal assets of the proprietor are exposed to all debts and liabilities incurred by the business
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The Advantages Of Sole Proprietorships.
Here are some advantages to owning a sole proprietorship.
- Simplicity and flexibility. The sole proprietorship is the simplest business to set up. The structure of the business can be very easily modified and it can be terminated or sold with ease.
- Apart from the required licenses and permits no legal assistance is usually required. You decide you are going into business and you simply get started.
The Disadvantages Of Sole Proprietorships.
There are also disadvantages to owning a sole proprietorship. Here are some of them.
- All assets and liabilities of the sole proprietorship are intermingled with personal assets and liabilities. Everything the proprietor and his family owns are at risk.
- Upon the death of the owner the business terminates. If, for example, another member of the family or a friend wants to continue it a new business must be formed.
- The activities of the business owner are limited in terms of taking advantage of business opportunities that may present themselves as business assets are also personal assets.
- Credit availability may also be limited.
Tax Issues.
All income and expenses of the business must be included on the owners Form 1040 for income tax purposes. They are reported on a Schedule C attached to the Income Tax Return Form.
Life Insurance.
Why should the owners of sole proprietorships buy life insurance? As a sole proprietor you maintain the responsibility to see that your business operates efficiently and at the same time you must ensure that your family is protected in the event of your death.
You must set up a buy-sell agreement naming a specific person or persons to take over the business. This is usually a family member but could be a key Employee. The buy-sell agreement is a legal entity and is binding. The most efficient way to fund this agreement is through life insurance.
Family Member Buying The Business
If your buy-sell agreement states that a specific member of your family will take over the business the bickering and disagreement that sometimes arise over an estate will be eliminated. Moreover, the purchase of the business will be funded by life insurance thereby providing ready cash for the purchase.
Key Employee Buying The Business
If the key employee is taking over the business it may be difficult to come up with sufficient funds to buy the business over a reasonable period of time. The family surely will want settlement as quickly as possible. If the buy-sell agreement is funded by life insurance there will be sufficient cash for the transaction.
You can use term life insurance or permanent life insurance to fund the agreement for the sale and purchase of the sole proprietorship.
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